Economic growth and process spillovers with step-by-step innovation

This paper extends previous research on the effects of process imitation on economic growth by accounting for stochastic intra-industry spillovers. We employ a non-Schumpeterian growth model to determine the impact of such spillovers on investment in industries where firms are either neck-and-neck or unleveled. Our central finding is that, in an economy where the representative industry is a duopoly, research and development (RD) spillovers positively affect economic growth. While other non-Schumpeterian models assume that the imitation rate of laggard firms is unaffected by the RD effort of the leader firm, we consider the case where the latter’s RD activity generates some positive externality on its rivals’ research. In this construct, the duopolists in each industry play a two-stage game. In the first stage, they invest in RD which can reduce their costs of production only if they successfully innovate and they compete with each other by using Markovian strategies. In the second stage, they compete in the product market. At any point in time, an industry can be either in the neck-and-neck state or in an unleveled state where the leader is n steps ahead of the follower. At the steady state, the inflow of firms to an industry must be equal to the outflow. By determining the steady state investment levels of each industry, we demonstrate a positive monotonic relationship between the spillover rate and economic growth.